Ever since climate change emerged as a serious risk facing not just business but life as we know it, the focus has been on the physical impact of climate change. Understandable, since we see these acute risks – the changing frequency and severity of natural catastrophes – and are working toward finding ways to manage or mitigate them. We also see chronic perils, slow and constantly evolving such as temperature increases or sea level rise that are equally difficult to address.
Yet often, we as a risk management industry do not consider the impact those longer-term chronic risks have on business, but instead focus more broadly on the short-term acute physical risk. However, as climate risk evolves and spreads, risk management professionals need to look beyond the four walls of their organization to see how such risks impact their business in other ways.
A big impact is often felt in the supply chain. Are there elements of your supply chain that could be disrupted because of a changing climate? An easy example of such impact would be the food and beverage industry, where a climate event could significantly impact the agriculture lifecycle. A widespread long-term drought impacting the supply of grains comes easily to mind.
What may not be considered is how a flood or a wildfire in a supplier location could bring business to a halt for an extended period of time. A climate event disrupts not just the supplier business but also the dependent infrastructure – communication networks, seaports, utility access, and more.
Such mounting risk exposures are not the only threats to business continuity. One area that gets little attention is the extent to which organizations have climate-related liability. In fact, there are a growing number of cases globally where companies are being challenged for potentially not acting fast enough on establishing their net-zero plans.
As we transition to net-zero there are 3 areas that are going to drive change: policy, technology and consumer behavior.
The bumpy road to Net Zero
As governments and businesses alike commit to dealing with the challenges of a changing climate, the transition is expected to be anything but smooth. As we transition to net-zero there are 3 areas that are going to drive change: policy, technology and consumer behavior. These factors will influence the business models of all companies across all industries in the economy with the timing and magnitude of these impacts uncertain due to the geographies that companies operate in. How business models and regulatory requirements change will be of paramount importance to risk managers across all industries.
As organizations grapple with these challenges, independent entities are setting forth recommended steps to help address climate issues while others are putting pressure on governments and businesses to step up compliance. For example, the Financial Stability Board set up a governance framework that gives organizations tools to meet regulatory requirements in other countries and jurisdictions. Also, the United Nations Climate Change Conference (COP27) is ready to call out the unfulfilled promises of wealthy countries in ensuring a Just Transition.
All of those factors are impacted by the interconnectedness of these risks and of global business. Organizations must adopt new strategies for addressing the whole impact of climate risk and adapt to an emerging regulatory environment. So how does risk management build a mitigation strategy around the need to use energy, the push to reduce carbon use, and the consumer demand for more sustainable business practices?
Building a broader climate response
With the growing awareness and growing requirements around disclosures and additional reporting brought on by a changing climate, risk managers should work toward understanding that liability and the language and interconnectedness of climate change risks.
From there, risk managers can build more robust resilience and adaptation around the physical, transition and liability risks associated with a changing climate. That happens when we change how we think about climate risk, and broaden the conversation to address the organizational impact, both from an operations and a risk perspective.
This requires risk managers to understand the corporate strategy around climate. You might need to change how you think about how a risk management program needs to evolve, especially from a supply chain perspective which are particularly vulnerable to climate change-related disruption. The more resilience you are able to build around your supply chain, the better your organization’s ability to operate without interruption.
Knowing that and imparting it to the key decision-makers can help your organization prepare for climate-related disruptions. It also means risk management needs to be part of the conversation, if not the resource and knowledge center for the organization.
Part of that knowledge should include your historic risk profile. Look at where your business was five to ten years ago. Compare it to where you are now and the way that you’ve seen the business change to embrace the technology revolution, how have you contributed to the transition to a low carbon economy? Consider where your business is going over the next five to twenty years and how the risks could change through the lens of; physical, transition and liability risks.
What do you need to disclose now about the types of things going on with the business that were not happening previously? What can you see coming that will need to be addressed? What changes do you anticipate in the future? All of these elements will have an effect on your risk profile and will make a difference in how you manage and mitigate climate risks.
Giving your climate response plan – and your organization’s climate commitment – a deeper level of scrutiny can identify risks that may not be on the company radar. It is on the risk manager, therefore, to become the lead voice in climate risk and to educate management on how climate action – and inaction – can impact business profitability and continuity. Through this you can help your organization build a more resilient supply chain, and a more resilient operation.
View Amy, Andy and James’ discussion with Justin Smulison of RIMS for a webinar – "" – now available on-demand.
About the authors
Amy Barnes is Head of Sustainability and Climate Change Strategy for Marsh. She is responsible for leading Marsh’s global strategy on the development of climate and sustainability-related initiatives for clients, particularly in relation to the impact of a changing physical risk landscape, improving access to capital for green initiatives, and a more thorough understanding of climate-related project risk.
Andrew MacFarlane is AXA XL’s Head of Climate. He is responsible for developing a single, global climate strategy for 色多多视频 ensuring the division’s climate-related efforts are aligned towards furthering AXA’s climate leadership position.
James Martin is AXA XL’s Head of Client Management and Business Development in the Americas Region. He leads a team of client management professionals to shape how we engage with our clients to foster valuable partnerships, deliver unsurpassed service excellence to them and create a unique customer experience.
